It’s my belief that PacSun CEO Gary Schoenfeld has mostly done the right things since he joined the company. But so far PacSun hasn’t been able to reclaim the competitive position in the market it used to have. Maybe, if this wasn’t a brutally competitive, over supplied, retail environment, things would be different. But they aren’t and now I see PacSun’s finding its ability to compete constrained by a weakening balance sheet and cash flow issues.

“Without a doubt, the bar keeps getting raised in terms of what it takes to be successful, given overall headwinds in retail and apparel and the battles for consumer discretionary spending. Clear merchandising strategies, consistent in-store execution across our entire chain and further penetration into the digital world of our customers, are all essential.”

For the quarter ended October 31, PacSun revenues fell 3% to $205.9 million compared to $212.3 million in the same quarter last year. $5.2 million of the decline came from a 3% decline in comparative store sales. Ecommerce sales rose 8% and were 7% of total sales.

Gross margin fell from 26.7% to 25.1%. Of the total change of 1.6%, 0.9% came from a decline in merchandise margins and another 0.9% from increasing occupancy costs. They got 0.2% back through lower buying, distribution and shopping costs.

They cut selling, general and administrative expenses from 27.3% to 25.9% or from $58.0 to $53.4 million. The operating loss rose from $1.34 to $1.65 million. They had a noncash gain on their derivative liability (from the Golden Gate Capital deal) of $2.7 million compared to $4.9 million in last year’s quarter. Interest expense rose from $3.87 to $4.33 million.

The net loss was $3.35 million, up from a loss of $469,000 in last year’s quarter. For the first nine months of their year, they had a profit of $1.5 million compared to a loss of $3.37 million for nine months the previous year.

The current ratio on the balance sheet is slightly changed, falling from 1.16 a year ago to 1.11. I’d note an increase in inventory from $129 a year ago to $140 million now. Port delays earlier in the year were responsible for some of the increase.

Accounts payable are down from $81.6 to $69.3 million. There’s $35 million drawn under their line of credit where last year the number was zero. Current liabilities have risen from $140.6 to $153.8 million, but that derivative liability (a current liability) is down almost $14 million.

Total shareholders’ equity has fallen from $16.1 million a year ago to a negative $6.2 million. The cash flow statement shows an outflow in cash used in operating activities of $32.7 million so far this year compared to an outflow of $4.3 million in the same period last year.

There’s a lot of conversation around liquidity in the 10Q filing. They tell us they expect to borrow up to another $35 million during the current quarter from their Wells Fargo line to finance holiday inventory, but that most of it is expected to be repaid by the end of the quarter. As I’ve reminded you before, they also have a $75.6 million payment to make for a term loan and some “payment in kind” interest due December 7th 2016. The line of credit from Wells Fargo matures the same day. It’s pretty clear they won’t be able to make that payment from their own cash flow. They are talking with the lender (Golden Gate) about how that might be managed. They are also considering a sale and leaseback of their corporate headquarters and their distribution center “…as a source of potential additional liquidity.”

They’ve actually added a risk factor associated with their liquidity issues. Lawyers take an abundance of caution approach in including these things, and they are risks- which all businesses have- and not something that’s necessarily going to happen. Here’s what they say:

“Our liquidity has been adversely impacted by our negative operating results and we cannot assure you that we will have sufficient liquidity going forward if certain negative trends continue, or if we are not able to refinance the Term Loan in light of the upcoming maturity of the Wells Credit Facility and the Term Loan.”

Interestingly, there was only one question during the conference call. An analyst wanted to know if there was any progress on the sale leaseback of the headquarters and distribution center. Gary’s answer was, “We continue to have discussions but we haven’t progressed to anything beyond what we previously indicated…”

Here’s the guidance they gave for the fourth quarter. “Our guidance for Q4 ‘15 contemplates a non-GAAP net loss per diluted share, ranging between negative $0.14 and negative $0.04 per diluted share…”

It’s not good news when you see a retailer projecting a loss during the fourth quarter of the year. But I’m particularly flummoxed by the fact that they give us a non-GAAP number. This non-GAAP guidance excludes the impact of the derivative liability, which I understand, but what else does it exclude or include? I could understand if they gave us both GAAP and non-GAAP guidance, but getting only the non-GAAP guidance bothers me.

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Jeff Harbaugh has more than 20 years spent developing strategies to respond to changing market conditions, in-depth, objective knowledge of the action sports/outdoor/youth culture industry and skills to help you manage growth and make the transition from entrepreneur to manager.